Economics in One Lesson
Page 13
It may be thought that we can escape these consequences by offering “work relief” instead of “home relief;” but we merely change the nature of the consequences. Work relief means that we are paying the beneficiaries more than the open market would pay them for their efforts. Only part of their relief-wage is for their efforts, therefore, while the rest is a disguised dole.
It remains to be pointed out that government make-work is necessarily inefficient and of questionable utility. The government has to invent projects that will employ the least skilled. It cannot start teaching people carpentry, masonry, and the like, for fear of competing with established skills and arousing the antagonism of existing unions. I am not recommending it, but it probably would be less harmful all around if the government in the first place frankly subsidized the wages of submarginal workers at the work they were already doing. Yet this would create political headaches of its own.
We need not pursue this point further, as it would carry us into problems not immediately relevant. But the difficulties and consequences of relief must be kept in mind when we consider the adoption of minimum wage laws or an increase in minimums already fixed.1
Before we finish with the topic I should perhaps mention another argument sometimes put forward for fixing a minimum wage rate by statute. This is that in an industry in which one big company enjoys a monopoly, it need not fear competition and can offer below-market wages. This is a highly improbable situation. Such a “monopoly” company must offer high wages when it is formed, in order to attract labor from other industries. Thereafter it could theoretically fail to increase wage rates as much as other industries, and so pay “substandard” wages for that particular specialized skill. But this would be likely to happen only if that industry (or company) was sick or shrinking; if it were prosperous or expanding, it would have to continue to offer high wages to increase its labor force.
We know as a matter of experience that it is the big companies—those most often accused of being monopolies—that pay the highest wages and offer the most attractive working conditions. It is commonly the small marginal firms, perhaps suffering from excessive competition, that offer the lowest wages. But all employers must pay enough to hold workers or to attract them from each other.
3
All this is not to argue that there is no way of raising wages. It is merely to point out that the apparently easy method of raising them by government fiat is the wrong way and the worst way.
This is perhaps as good a place as any to point out that what distinguishes many reformers from those who cannot accept their proposals is not their greater philanthropy, but their greater impatience. The question is not whether we wish to see everybody as well off as possible. Among men of good will such an aim can be taken for granted. The real question concerns the proper means of achieving it. And in trying to answer this we must never lose sight of a few elementary truisms. We cannot distribute more wealth than is created. We cannot in the long run pay labor as a whole more than it produces.
The best way to raise wages, therefore, is to raise marginal labor productivity. This can be done by many methods: by an increase in capital accumulation—i.e., by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of employers; by more industriousness and efficiency on the part of workers; by better education and training. The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid. Real wages come out of production, not out of government decrees.
So government policy should be directed, not to imposing more burdensome requirements on employers, but to following policies that encourage profits, that encourage employers to expand, to invest in newer and better machines to increase the productivity of workers—in brief, to encourage capital accumulation, instead of discouraging it—and to increase both employment and wage rates.
1In 1938, when the average hourly wage paid in all manufacturing in the United States was about 63 cents an hour, Congress set a legal minimum of only 25 cents. In 1945, when the average factory wage had risen to $1.02 an hour, Congress raised the legal minimum to 40 cents. In 1949, when the average factory wage had risen to $1.40 an hour, Congress raised the minimum again to 75 cents. In 1955, when the average had risen to $1.88, Congress boosted the minimum to $1. In 1961, with the average factory wage at about $2.30 an hour, the minimum was raised to $1.15 in 1961 and to $1.25 for 1963. To shorten the account, the minimum wage was raised to $1.40 in 1967, to $1.60 in 1968, to $2.00 in 1974, to $2.10 in 1975, and to $2.30 in 1976 (when the average wage in all private nonagricultural work was $4.87). Then in 1977, when the actual average hourly wage in nonagricultural work was $5.26, the minimum wage was raised to $2.65 an hour, with provision made for notching it up still further in each of the next three years. Thus, as the prevailing hourly wage goes higher, the minimum wage advocates decide that the legal minimum must be raised at least correspondingly. Though the legislation follows the rise of the prevailing market wage rate, the myth continues to be built up that it is the minimum wage legislation that has raised the market wage.
Chapter XX
DO UNIONS REALLY RAISE WAGES?
THE BELIEF THAT labor unions can substantially raise real wages over the long run and for the whole working population is one of the great delusions of the present age. This delusion is mainly the result of failure to recognize that wages are basically determined by labor productivity. It is for this reason, for example, that wages in the United States were incomparably higher than wages in England and Germany all during the decades when the “labor movement” in the latter two countries was far more advanced.
In spite of the overwhelming evidence that labor productivity is the fundamental determinant of wages, the conclusion is usually forgotten or derided by labor union leaders and by that large group of economic writers who seek a reputation as “liberals” by parroting them. But this conclusion does not rest on the assumption, as they suppose, that employers are uniformly kind and generous men eager to do what is right. It rests on the very different assumption that the individual employer is eager to increase his own profits to the maximum. If people are willing to work for less than they are really worth to him, why should he not take the fullest advantage of this? Why should he not prefer, for example, to make $1 a week out of a workman rather than see some other employer make $2 a week out of him? And as long as this situation exists, there will be a tendency for employers to bid workers up to their full economic worth.
All this does not mean that unions can serve no useful or legitimate function. The central function they can serve is to improve local working conditions and to assure that all of their members get the true market value of their services.
For the competition of workers for jobs, and of employers for workers, does not work perfectly. Neither individual workers nor individual employers are likely to be fully informed concerning the conditions of the labor market. An individual worker may not know the true market value of his services to an employer. And he may be in a weak bargaining position. Mistakes of judgment are far more costly to him than to an employer. If an employer mistakenly refuses to hire a man from whose services he might have profited, he merely loses the net profit he might have made from employing that one man; and he may employ a hundred or a thousand men. But if a worker mistakenly refuses a job in the belief that he can easily get another that will pay him more, the error may cost him dear. His whole means of livelihood is involved. Not only may he fail to find promptly another job offering more; he may fail for a time to find another job offering remotely as much. And time may be the essence of his problem, because he and his family must eat. So he may be tempted to take a wage that he believes to be below his “real worth” rather than face these risks. When an employer’s worker
s deal with him as a body, however, and set a known “standard wage” for a given class of work, they may help to equalize bargaining power and the risks involved in mistakes.
But it is easy, as experience has proved, for unions, particularly with the help of one-sided labor legislation which puts compulsions solely on employers, to go beyond their legitimate functions, to act irresponsibly, and to embrace short-sighted and antisocial policies. They do this, for example, whenever they seek to fix the wages of their members above their real market worth. Such an attempt always brings about unemployment. The arrangement can be made to stick, in fact, only by some form of intimidation or coercion.
One device consists in restricting the membership of the union on some other basis than that of proved competence or skill. This restriction may take many forms: it may consist in charging new workers excessive initiation fees; in arbitrary membership qualifications; in discrimination, open or concealed, on grounds of religion, race or sex; in some absolute limitation on the number of members, or in exclusion, by force if necessary, not only of the products of nonunion labor, but of the products even of affiliated unions in other states or cities.
The most obvious case in which intimidation and force are used to put or keep the wages of a particular union above the real market worth of its members’ services is that of a strike. A peaceful strike is possible. To the extent that it remains peaceful, it is a legitimate labor weapon, even though it is one that should be used rarely and as a last resort. If his workers as a body withhold their labor, they may bring a stubborn employer, who has been underpaying them, to his senses. He may find that he is unable to replace these workers with workers equally good who are willing to accept the wage that the former have now rejected. But the moment workers have to use intimidation or violence to enforce their demands—the moment they use mass picketing to prevent any of the old workers from continuing at their jobs, or to prevent the employer from hiring new permanent workers to take their places—their case becomes suspect. For the pickets are really being used, not primarily against the employer, but against other workers. These other workers are willing to take the jobs that the old employees have vacated, and at the wages that the old employees now reject. The fact proves that the other alternatives open to the new workers are not as good as those that the old employees have refused. If, therefore, the old employees succeed by force in preventing new workers from taking their place, they prevent these new workers from choosing the best alternative open to them, and force them to take something worse. The strikers are therefore insisting on a position of privilege, and are using force to maintain this privileged position against other workers.
If the foregoing analysis is correct, the indiscriminate hatred of the “strikebreaker” is not justified. If the strikebreakers consist merely of professional thugs who themselves threaten violence, or who cannot in fact do the work, or if they are being paid a temporarily higher rate solely for the purpose of making a pretense of carrying on until the old workers are frightened back to work at the old rates, the hatred may be warranted. But if they are in fact merely men and women who are looking for permanent jobs and willing to accept them at the old rate, then they are workers who would be shoved into worse jobs than these in order to enable the striking workers to enjoy better ones. And this superior position for the old employees could continue to be maintained, in fact, only by the ever-present threat of force.
2
Emotional economics has given birth to theories that calm examination cannot justify. One of these is the idea that labor is being “underpaid” generally. This would be analogous to the notion that in a free market prices in general are chronically too low. Another curious but persistent notion is that the interests of a nation’s workers are identical with each other, and that an increase in wages for one union in some obscure way helps all other workers. Not only is there no truth in this idea; the truth is that, if a particular union by coercion is able to enforce for its own members a wage substantially above the real market worth of their services, it will hurt all other workers as it hurts other members of the community.
In order to see more clearly how this occurs, let us imagine a community in which the facts are enormously simplified arithmetically. Suppose the community consisted of just half a dozen groups of workers, and that these groups were originally equal to each other in their total wages and the market value of their product.
Let us say that these six groups of workers consist of (1) farm hands, (2) retail store workers, (3) workers in the clothing trades, (4) coal miners, (5) building workers, and (6) railway employees. Their wage rates, determined without any element of coercion, are not necessarily equal; but whatever they are, let us assign to each of them an original index number of 100 as a base. Now let us suppose that each group forms a national union and is able to enforce its demands in proportion not merely to its economic productivity but to its political power and strategic position. Suppose the result is that the farm hands are unable to raise their wages at all, that the retail store workers are able to get an increase of 10 percent, the clothing workers of 20 percent, the coal miners of 30 percent, the building trades of 40 percent, and the railroad employees of 50 percent.
On the assumptions we have made, this will mean that there has been an average increase in wages of 25 percent. Now suppose, again for the sake of arithmetical simplicity, that the price of the product that each group of workers makes rises by the same percentage as the increase in that group’s wages. (For several reasons, including the fact that labor costs do not represent all costs, the price will not quite do that—certainly not in any short period. But the figures will nonetheless serve to illustrate the basic principle involved.)
We shall then have a situation in which the cost of living has risen by an average of 25 percent. The farm hands, though they have had no reduction in their money wages, will be considerably worse off in terms of what they can buy. The retail store workers, even though they have got an increase in money wages of 10 percent, will be worse off than before the race began. Even the workers in the clothing trades, with a money-wage increase of 20 percent, will be at a disadvantage compared with their previous position. The coal miners, with a money-wage increase of 30 percent, will have made in purchasing power only a slight gain. The building and railroad workers will of course have made a gain, but one much smaller in actuality than in appearance.
But even such calculations rest on the assumption that the forced increase in wages has brought about no unemployment. This is likely to be true only if the increase in wages has been accompanied by an equivalent increase in money and bank credit; and even then it is improbable that such distortions in wage rates can be brought about without creating areas of unemployment, particularly in the trades in which wages have advanced the most. If this corresponding monetary inflation does not occur, the forced wage advances will bring about widespread unemployment.
The unemployment need not necessarily be greatest, in percentage terms, among the unions whose wages have been advanced the most; for unemployment will be shifted and distributed in relation to the relative elasticity of the demand for different kinds of labor and in relation to the “joint” nature of the demand for many kinds of labor. Yet when all these allowances have been made, even the groups whose wages have been advanced the most will probably be found, when their unemployed are averaged with their employed members, to be worse off than before. And in terms of welfare, of course, the loss suffered will be much greater than the loss in merely arithmetical terms, because the psychological losses of those who are unemployed will greatly outweigh the psychological gains of those with a slightly higher income in terms of purchasing power.
Nor can the situation be rectified by providing unemployment relief. Such relief, in the first place, is paid for in large part, directly or indirectly, out of the wages of those who work. It therefore reduces these wages. “Adequate” relief payments, moreover, as we have already seen,
create unemployment. They do so in several ways. When strong labor unions in the past made it their function to provide for their own unemployed members, they thought twice before demanding a wage that would cause heavy unemployment. But where there is a relief system under which the general taxpayer is forced to provide for the unemployment caused by excessive wage rates, this restraint on excessive union demands is removed. Moreover, as we have already noted, “adequate” relief will cause some men not to seek work at all, and will cause others to consider that they are in effect being asked to work not for the wage offered, but only for the difference between that wage and the relief payment. And heavy unemployment means that fewer goods are produced, that the nation is poorer, and that there is less for everybody.
The apostles of salvation by unionism sometimes attempt another answer to the problem I have just presented. It may be true, they will admit, that the members of strong unions today exploit, among others, the nonunionized workers; but the remedy is simple: unionize everybody. The remedy, however, is not quite that simple. In the first place, in spite of the enormous legal and political encouragements (one might in some cases say compulsions) to unionization under the Wagner-Taft-Hartley Act and other laws, it is not an accident that only about a fourth of this nation’s gainfully employed workers are unionized. The conditions propitious to unionization are much more special than generally recognized. But even if universal unionization could be achieved, the unions could not possibly be equally powerful, any more than they are today. Some groups of workers are in a far better strategic position than others, either because of greater numbers, of the more essential nature of the product they make, of the greater dependence on their industry of other industries, or of their greater ability to use coercive methods. But suppose this were not so? Suppose, in spite of the self-contradictoriness of the assumption, that all workers by coercive methods could raise their money wages by an equal percentage? Nobody would be any better off, in the long run, than if wages had not been raised at all.